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Introduction and Summary

Two of the most important macroeconomic concepts in the popular media are inflation and unemployment. In fact, it is difficult to read through the business section of the newspaper or watch the evening news without hearing at least one of these ideas mentioned.

Why are people so concerned with inflation and unemployment? These macroeconomic concepts affect every person in the economy. When inflation is high, prices increase rapidly and interest rates rise. When unemployment is high, joblessness is high and people are out of work. A report of high inflation or high unemployment causes concern at some level to most consumers. In short, inflation and unemployment bear directly upon the wealth and standard of living of people within the economy.

But how do these concepts fit into the bigger picture of macroeconomics? Inflation affects the purchasing power of money over time; interest rates, savings, and consumption are closely tied to the inflation rate both in theory and in practice. Similarly, the unemployment rate is an important variable in economic growth and is even linked to the inflation rate. Most importantly, both of these variables are useful in expressing and comparing the state of the economy to past and present, yet are simple enough to be accessible to the average informed consumer.

This SparkNote, in conjunction with the SparkNote on GDP and CPI, provides a complete basic set of tools for measuring the economy. An understanding of how these concepts function together to measure the economy provides the opportunity to see the effects of economic changes that might otherwise get lost in the noise.